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Trust Examination Manual
Advisory
Opinion 2003-11A
September 8, 2003
2003-11A
ERISA Sec. 404(c)
Stephen M. Saxon
Groom Law Group, Chartered
1701 Pennsylvania Ave., NW
Washington, DC 20006-5893
Dear Mr. Saxon:
This is in response to your request for guidance under the Employee Retirement
Income Security Act of 1974 (ERISA). In particular, you ask whether a participant-directed
individual account plan’s delivery of a mutual fund Profile, as described below,
to participants and beneficiaries immediately before or immediately after their
investment in the mutual fund would satisfy regulations issued by the Department
of Labor (Department) pursuant to section 404(c) of ERISA.
You represent that the Principal Financial Group (Principal) provides investment
products and administrative services to tax-qualified defined contribution plans
established pursuant to section 401(a) of the Internal Revenue Code of 1986 (the
Code), including plans that permit employee elective deferrals under section
401(k) of the Code (401(k) plans). Many of these 401(k) plans permit participants
to direct the investments of the amounts in their individual accounts. These
401(k) plans are typically designed and administered by Principal to comply with
regulations issued by the Department pursuant to section 404(c) of ERISA (404(c)
regulations).(1)
Section 404(c) of ERISA provides that, in the case of an individual account
plan that permits participants or beneficiaries to exercise control over
assets in
their accounts, no person who is otherwise a fiduciary shall be liable under
part 4 of Title I of ERISA for any loss, or by reason of any breach, which
results from such participant’s or beneficiary’s exercise of control. The
404(c) regulations
require, among other things, that a participant or beneficiary shall be provided
or have the opportunity to obtain sufficient information to make informed
decisions with regard to investment alternatives available under the plan.(2)
In the case
of an investment alternative subject to the registration requirements of
the Securities Act of 1933 (Securities Act) such as a mutual fund, the 404(c)
regulations
provide that a participant or beneficiary shall be provided by the identified
plan fiduciary (or a person or persons designated by the plan fiduciary to
act on his behalf), a copy of the most recent prospectus that
was provided to the plan, either immediately before the participant’s or
beneficiary’s initial investment in such investment alternative, or immediately
following the
participant’s or beneficiary’s initial investment.(3) The 404(c) regulations
also provide that a participant or beneficiary shall be provided, either
directly or upon request, the following information, which shall be based
on the latest
information available to the plan: copies of any prospectuses, financial
statements and reports, and of any other materials relating to the investment
alternatives
available under the plan, to the extent such information is provided to the
plan.(4)
Section 2(a)(10) of the Securities Act generally defines the term “prospectus”
to include any notice, circular, advertisement, letter, or communication that
offers any security for sale or confirms the sale of any security.(5) Section
10(a) of the Securities Act generally provides that a prospectus relating to
a security (10(a) prospectus) shall contain much of the same information that
is contained in the registration statement of the security.(6) Section 10(a)
of the Securities Act specifies the information that a prospectus must contain
and the information that a prospectus may omit.(7) Section 10(b) of the Securities
Act provides that the Securities and Exchange Commission (SEC) shall, by rules
or regulations deemed necessary or appropriate in the public interest or for
the protection of investors, permit the use of a summary document (10(b) prospectus)
which omits in part or summarizes information provided in a 10(a) prospectus.
Under section 5(b)(1) of the Securities Act, a 10(b) prospectus may be provided
to an investor in connection with an offer to sell a registered security.(8)
Under section 5(b)(2) of the Securities Act, however, a 10(a) prospectus must
be provided to an investor at or before any sale of a registered security.(9)
Thus, under the federal securities laws, while a summary document under section
10(b) of the Securities Act may be delivered for purposes of an offer, a 10(a)
prospectus would, in any event, also be required to be delivered in order to
sell a registered security.
On March 13, 1998, the SEC adopted Rule 498 under the Securities Act (Securities
Act Rule 498). Under Securities Act Rule 498, a summary prospectus, or a
Profile, designed to comply with section 10(b) of the Securities Act, may
be delivered
to investors in connection with an offer to purchase or sell mutual fund
shares.(10) Paragraph (b) of Securities Act Rule 498 provides that a Profile
is intended
to be a standardized summary of key information contained in a 10(a) prospectus.
Securities Act Rule 498 requires a Profile to provide clear and concise information
in a format designed to communicate information effectively, while avoiding
excessive detail, technical or legal terms, and long sentences and paragraphs.(11)
A Profile
is specifically required to include, among other things: identifying information;
an explanation that the Profile summarizes key information included in the
prospectus; information regarding how investors can obtain the prospectus;
investment objectives,
strategies, and risks; fees and expenses;
identities of investment advisers and managers; information regarding purchase
and sale of shares; investment requirements; distributions and tax information;
and other services available.
In adopting Securities Act Rule 498, the SEC stated its belief that investors
in participant-directed defined contribution plans may find a Profile helpful
in evaluating and comparing funds offered as investment alternatives in a plan.(12)
Paragraph (d)(1) of Securities Act Rule 498 provides that, in a Profile intended
for use with respect to a 401(k) plan, a mutual fund may modify or omit certain
information which may not be relevant to participants and beneficiaries of a
plan, such as information about requirements for purchasing and selling shares,
fund distributions, tax consequences with regard to distributions, and other
fund services that are not applicable to plan participants and beneficiaries.
The SEC did not, however, authorize the use of the Profile for purposes of a
sale under section 5(b)(2) of the Securities Act.
You represent that, because Principal’s 401(k) plan clients typically design
and administer their plans to comply with the 404(c) regulations, administrative
services provided by Principal include assistance in meeting the disclosure
and other requirements of the 404(c) regulations. With regard to mutual funds,
Principal
proposes to deliver Profiles of mutual funds, including its proprietary funds,
to participants of 401(k) plans designed to comply with the 404(c) regulations.
You represent that Principal believes that delivery of a mutual fund Profile
to a participant of a 401(k) plan designed to comply with the 404(c) regulations
will satisfy the requirement under the 404(c) regulations that a prospectus
be delivered to each participant either immediately before or immediately
after
the participant’s initial investment in the mutual fund.(13) You assert that
automatic delivery of a Profile would permit plans to avoid the additional
expense of automatically providing a lengthy 10(a) prospectus. In addition, you
represent that, with regard to delivery of a 10(a) prospectus, Principal
will send a 10(a) prospectus to any requesting participant or beneficiary
within three
days of receipt of such request.(14)
You assert that, consistent with the Department’s reasoning in the preamble
to the 404(c) regulations with regard to delivery of a prospectus, the delivery
of a Profile, as a concise summary of a mutual fund’s investment objectives,
risk and return characteristics, and type and diversification of assets,
will
provide participants and beneficiaries with the information necessary for
them to make informed investment decisions with respect to investment in
mutual funds.
You assert that the required delivery of a prospectus under section 404(c)
is intended to ensure that participants and beneficiaries are provided with
sufficient
information in order to be able to make informed decisions with respect to
investment alternatives under the plan. In this regard, you represent that
a Profile conveys
all the information about a mutual fund that the 404(c) regulations require
to be delivered automatically to participants in connection with each designated
investment option (i.e., the description of investment objectives,
risk and return characteristics, type and diversification of assets, and
identification of investment manager, required by 29 CFR section 2550.404c-1(b)(2)(i)(B)(1)(ii)
and (iii)).
You specifically ask whether delivery of a Profile would satisfy a participant-directed
individual account plan’s obligation under the 404(c) regulations to deliver
a copy of the most recent prospectus to plan participants and beneficiaries immediately
before or immediately after such individuals initially invest in mutual funds.
The Department has not defined the term “prospectus” in the 404(c) regulations,
or elsewhere. In the preamble to the 404(c) regulations, the Department states
that the prospectus delivery requirement is intended to ensure that, immediately
before or immediately after a participant’s or beneficiary’s initial investment
in an investment alternative, such as a mutual fund, that is required to deliver
a prospectus to investors under the federal securities laws, participants and
beneficiaries must be afforded the opportunity to review the prospectus in connection
with an initial investment in such investment alternative.(15)
The Department takes no position with respect to the application of the federal
securities laws to your question. However, it is the view of the Department that,
under the 404(c) regulations, the term “prospectus” includes a Profile. The Department
believes that the delivery of a Profile by an identified plan fiduciary or designee
to plan participants or beneficiaries satisfies the requirements of the 404(c)
regulations because it provides a clear summary of key information about a mutual
fund that is useful to such participants and/or beneficiaries.
A Profile, designed to comply with section 10(b) of the Securities Act, provides
participants with information of the sort that the Department intended a participant
in a section 404(c) plan to receive both automatically and upon request with
respect to a relevant investment. Moreover, if a participant wishes to obtain
additional information, the cover page of the Profile shows how to obtain a 10(a)
prospectus from the offeror.
Where the most recent prospectus in the plan’s possession is a Profile, then
delivering the Profile to plan participants and beneficiaries, immediately before
or immediately after such individuals’ initial investment in a mutual fund, would
satisfy a participant-directed individual account plan’s prospectus delivery
obligation under 29 CFR section 2550.404c-1(b)(2)(i)(B)(1)(viii). Where the most
recent prospectus is a 10(a) prospectus, 29 CFR section 2550.404c-1(b)(2)(i)(B)(1)(viii)
would require the delivery of a 10(a) prospectus.
Separately, under 29 CFR section 2550.404c-1(b)(2)(i)(B)(2), the identified plan
fiduciary or designee must provide, either directly or upon request, copies of
prospectuses (among other things) based on the latest information available to
the plan. Where a participant requests a prospectus, and the most recent prospectus
is a Profile, then providing the Profile will comply with this requirement. If,
however, the participant specifically requests a 10(a) prospectus, the most recent
10(a) prospectus must be provided.
This letter constitutes an advisory opinion under ERISA Procedure 76-1. Accordingly,
it is subject to the provisions of that procedure, including section 10 thereof
relating to the effect of advisory opinions.
Sincerely,
Louis Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
Footnotes
29 CFR 2550.404c-1.
- 29 CFR 2550.404c-1(b)(2)(i)(B).
- 29 CFR 2550.404c-1(b)(2)(i)(B)(1)(viii).
- 29 CFR 2550.404c-1(b)(2)(i)(B)(2)(ii).
- See 15 USC 77b(a)(10).
- On March 13, 1998, the SEC adopted amendments to Form
N-1A, the registration form used by mutual funds. Pursuant to the amendments,
a mutual fund
prospectus must provide investors with essential
information about the mutual fund, including: risk/return summaries;
investment strategies;
mutual fund performance; management, organization,
and capital structure; shareholder information; and distribution arrangements.
A mutual fund
prospectus should avoid: lengthy legal and technical
discussions; a restatement of legal or regulatory requirements to which
mutual funds
generally are subject; and disproportionate emphasis
on possible investments or activities of the mutual fund that are not
a significant part of
the mutual fund’s investment operations. In addition,
a mutual fund prospectus may modify or omit certain items when mutual
funds are investment
options for 401(k) plans, including: procedures for
purchasing and redeeming mutual fund shares if such procedures are inapplicable; dividend
and distribution policies if such policies are inapplicable;
and tax consequences to shareholders with respect to buying, holding,
exchanging,
and selling mutual fund shares if such consequences
are inapplicable. See Registration Form Used by Open-End Management
Investment Companies,
Securities Act Release No. 7512 (March 13, 1998).
- See 15 USC 77j(a).
- See 15 USC 77j(b).
- See 15 USC 77e(b)
- See New Disclosure Option for Open-End Management Investment
Companies, Securities Act Release No. 7513 (March 13, 1998) (Securities
Act Rule 498 Adopting
Release). In adopting Securities Act Rule 498 which
permits the use of a Profile, the SEC stated that the “profile of a
fund will be a summary
prospectus under section 10(b) of the Securities
Act, but the fund’s section 10(a) prospectus will remain the primary
disclosure document
under the federal securities laws.” Securities Act
Rule 498 Adopting Release. Accordingly, paragraph (c)(1)(v) of Securities
Act Rule 498
requires that a Profile shall provide a toll-free
(or collect) telephone number that investors can use to obtain the prospectus
and a mutual
fund may indicate, as applicable, that the prospectus
and other information is available on the mutual fund’s internet site
or by e-mail request,
or that the prospectus is available through a financial intermediary.
- See 17 CFR 230.498.
- Securities Act Rule 498 Adopting Release, text accompanying
note 124.
- See 29 CFR 2550.404c-1(b)(2)(i)(B)(1)(viii).
- We note that the Instruction to Paragraph (c)(1)(v) of
Securities Act Rule 498 provides that when a mutual fund (or financial
intermediary
through which shares of the mutual fund may be purchased
or sold) receives a request for a 10(a) prospectus, the mutual fund
(or financial intermediary)
must send the 10(a) prospectus within three business
days.
- See 57 Fed. Reg. 46906, 46911 (October 13, 1992).
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